Physicians are discovering that investing in their medical office buildings provides multiple advantages over traditional renting, such as lower operating costs, the potential for long-term equity growth, tax breaks, more spacious offices, location of choice and greater control over building use and services offered.
Two years ago, 11-physician Heartland Primary Care opened a $4.1 million, 25,000-square-foot office near the Kansas Speedway in Village West, a growing area in western Kansas City, Kan., about five minutes from 257-bed Providence Medical Center, where the physicians hold privileges.
To secure bank financing, 14 physician-investors raised 10% of their money and borrowed another 10%, says G. Robert Powers, M.D., Heartland’s vice president and co-founder.
“We should have done this 20 years ago,” Powers says. “Doctors are knocking on our door trying to join. We are in a population growth area with 126,000 new rooftops.” Heartland’s building also houses three neurosurgeons, a pharmacy and a rehabilitation unit.
When Heartland rented space in a Providence-owned medical office building, Powers says the group attracted 10 to 20 new patients per month. “We now have 300 new patients a month,” he says.
Powers says Heartland had enough room on the site to open an urgent-care center. While local hospital administrators warned Powers that the center could lose $200,000 a year for the first two years, Powers says: “It has been tremendously successful. We made money the week we opened.”
Nationally, increasing numbers of physicians are acquiring medical office buildings, says Dan Fasulo, managing director with Real Capital Analytics, a New York-based real estate research and consulting firm.
In the 12 months ended March 31, $4 billion was spent in sales of medical office buildings, a 17% increase from the same period a year before, according to Real Capital.
“If these doctors are confident in the future success of their business, they don’t have anything to worry about,” Fasulo says. “It is hard to imagine where demographics would not increase the value of this kind of space. The only thing to worry about is certain constrained markets like Texas where they keep building offices and the supply exceeds demand.”
In May, 14-physician Kansas City (Mo.) Cardiology Associates moved into its new $5 million, 12,500-square-foot office in Lee’s Summit, Mo., some 20 miles southeast of Kansas City, Mo., says David Ireland, the practice’s business manager.
“We were paying a very high price in rent payments” at a hospital-owned building, says Ireland, adding that monthly payments will be 75% less per square foot for the owned building.
But the doctors initially were hesitant to build, Ireland says. “They are so indoctrinated in the traditional symbiotic relationship with a hospital,” he says.
The new offices will allow the physicians to expand diagnostic services that include echocardiology, vascular imaging and nuclear profusion, Ireland says. The group plans to build another 12,500 square feet in several years to add cardiac CT, he says.
“It makes great sense operationally and clinically for our doctors and patients,” Ireland says. “It cuts down on costs per square foot. Plus we get appreciation on the building and property.”
Facing declining reimbursements and rising professional and staffing costs, physicians stand to gain additional income by owning offices, says Jim Andrews, business development director for Miller-Stauch Construction Co., a project development and construction firm in Lenexa, Kan.
“Doctors are hungry for a new revenue stream,” says Duane Dean, president of Miller-Stauch.
Andrews says it typically takes 18 months to plan, acquire the property and build. Miller-Stauch assisted the Heartland and Kansas City Cardiology projects. “We advise them to pick the right location with enough property to grow,” he says.
Heartland also is planning three new buildings totaling 115,000 square feet. “We will double the size of our practice,” Powers says. The buildings will provide space for another 40 physicians, including optometrists and orthopedists.
“We are getting much more back on our investment here than on other investments,” Powers says.
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